Investors who are interested in maximizing the after-tax returns of their mutual fund holdings may consider investing in a tax-efficient fund. Tax-efficient funds seek to achieve long-term capital appreciation while limiting taxable distributions of capital gains and dividends. This approach attempts to reduce the effects of federal taxation on an investor's long-term return potential and increase after-tax return compared with similar funds for which tax efficiency is not a primary goal.

The Tax-Efficient Equity Fund, which T. Rowe Price introduced in 2000, seeks to maximize long-term capital growth on an after-tax basis. The fund typically invests in stocks of large-cap and mid-cap companies and also may invest a significant portion of its assets in technology companies.

The fund's goal is to generate competitive pre-tax performance and outperform on an after-tax basis over a full market cycle. In an effort to achieve strong after-tax returns, the fund seeks to avoid realizing capital gain distributions by limiting sales of existing holdings and not rotating from one sector to another in an attempt to capture short-term outperformance. However, taxable gains may be realized in order to satisfy redemption requests or when we believe the benefits of continuing to hold a security outweighs tax considerations. As appropriate, we may attempt to use losses from sales of securities that have declined to offset future gains that would otherwise be taxable.

Fund holdings are subject to market risk, and share prices may be more volatile than those of a fund focusing on slower-growing or cyclical companies.